Limitations

Break-even analysis is a useful tool for working out the minimum sales needed to avoid losses. However, it has its limitations. It makes assumptions about various factors - for example that all units are sold, that forecasts are reliable and the external environment is stable. If new rivals enter the market or an economic recession starts then it could take longer to reach the break-even point than anticipated.

Many organisations add on a margin of safety to the break-even level of output when deciding on their minimum sales target.

A margin of safety can help with dealing with external factors such as new rivals or an economic recession
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